Local Economic Shocks Research Articles

All (economic) politics is local: Voting responses to localized price shocks during the great recession

AbstractThe connection between individual and macroeconomic conditions and voting behavior is well‐established. We contribute to the less resolved “spatial gap” in the literature that centers on how the localized economic conditions of where voters live influence their likelihood to vote. We test how space mediates the tension between voter mobilization and withdrawal in the face of economic shocks. We consider a scenario, the Great Recession, where economic shocks were quite localized and sudden, and compile an extensive dataset of all registered voters in the four‐county Tampa metropolitan area between 2006 and 2015. Using sales prices and property characteristics from the tax assessor rolls, we estimate a neighborhood‐level shock to housing values induced by the Great Recession. Results show that when we do not account for local neighborhood variation, the Great Recession is associated with a significant decrease in voter turnout. However, when we account for localized economic shocks, we find that residents in neighborhoods with negative price shocks were more likely to vote after the Recession, especially in non‐local elections. In addition, the propensity to vote increases with the size of the negative price shock. There is some evidence that variation at the neighborhood level matters more than voter‐level heterogeneity. The positive voting response is most profound in predominantly Black neighborhoods, and, to a lesser extent, in predominantly Hispanic and the lowest income neighborhoods. Increases in the propensity to vote are robust to models controlling for baseline economic vulnerabilities, such as localized unemployment, the weakness of the local housing market and exposure to sectors hit hardest by the Recession. The results indicate that dramatic and sudden changes in localized economic conditions can drive voting behavior, and in ways that are distinct from macroeconomic drivers. In addition, the housing asset channel appears to be a powerful one, which can induce significant voting responses at the national level apart from other localized economic drivers, especially among homeowners.

Spatial Diffusion of Local Economic Shocks in Social Networks: Evidence from the US Fracking Boom

Spatial Diffusion of Local Economic Shocks in Social Networks: Evidence from the US Fracking Boom

The international transmission of local economic shocks through migrant networks

Using newly validated data on geographic migration networks, we study how labor demand shocks in the United States propagate across the border with Mexico. We show that the large exogenous decline in US employment brought about by the Great Recession affected demographic and economic outcomes in Mexican communities that were highly connected to the most affected markets in the US. In the Mexican locations with strong initial ties to the hardest hit US migrant destinations, return migration increased, emigration decreased, and remittance receipt declined. These changes significantly increased local employment and hours worked, but wages were unaffected. Investment in children’s education also slowed in these communities. These findings document the effects in Mexico when potential migrants lose access to a strong US labor market, providing insight into the potential impacts of stricter US migration restrictions.

The Effect of Local Economic Shocks on Local and National Elections

The Effect of Local Economic Shocks on Local and National Elections

Multimarket Banks, Local Economic Shocks, and Lending Behavior: When the Effect is on Cost but not on the Amount of Deposit Fundings

Multimarket Banks, Local Economic Shocks, and Lending Behavior: When the Effect is on Cost but not on the Amount of Deposit Fundings

Regional redistribution through SBA guaranteed loan programs

We document and quantify a new implicit transfer mechanism in the SBA 7(a) loan program that redistributes funds between US states. We use SBA 7(a) loan data in conjunction with Dealscan private corporate loan data to show that SBA 7(a) loan interest rates are much less responsive to predicted local loan default risk compared to private corporate loans. This redistributes funds from states with low default risk to states with high default risk. These transfers are positively correlated with the severity of local economic shocks during the Great Recession and the COVID-19 Recession. Therefore, even though it was unintended, the interest rates on SBA 7(a) loans acted as an automatic stabilizer mitigating regional economic shocks.

The effect of global financial markets and local shocks on Turkey airlines market; new evidence from structural break cointegration and causality tests

This study examines the relationship between Turkey's airline markets, which responded to local economic shocks, and the USA and Europe airlines market using daily closing stock price data from January 2016 to June 2022. All the variables are non-stationary at level but stationary at first difference. The long-run relationship among the variables is found by employing Maki's (2012) cointegration test considering multiple unknown structural breaks. In addition, the Granger causality analysis results of markets support the correlation of stock prices. The relationship between the global airlines market and Turkey's airlines market is analyzed with different regimes supporting structural breaks. This methodological framework may be considered a significant contribution to financial research.

The effects of the Great Migration on urban renewal

The Great Migration significantly increased the number of African American people moving to northern and western cities beginning in the first half of the twentieth century. We show that their arrival shaped “slum clearance” and urban redevelopment efforts in receiving cities. To estimate the effect of migrants, we instrument for Black population changes using a shift-share instrument that interacts historical migration patterns with local economic shocks that predict Black out-migration from the South. We find that local governments responded by undertaking more urban renewal projects that aimed to redevelop and rehabilitate “blighted” areas. More Black migrants also led to an increase in family displacement. This underscores the contribution of spatial policies such as urban renewal towards understanding the long-term consequences of the Great Migration on central cities, and Black neighborhoods and individuals.

Financial Globalization and Its Implications for Asset Allocation in a Dollar World

Unprecedented monetary policy measures carried out by the US Federal Reserve in response to the COVID-19 pandemic have raised the question of whether US dollar hegemony will continue going forward. In this article, the authors examine the multi-faceted nature of dollar hegemony with a focus on its relationship with globalization. They find that the US dollar is the dominant currency in global economic activities ranging from trade to cross-border banking, and this USD strength is reflected in the ability of US Treasuries to diversify local economic shocks. While they find that US Treasuries provide <i>historically</i> better diversification for local equity risk than local sovereign debt, in an ultra-low interest rate world, investors will likely need to consider alternative hedging approaches. As an illustration of a potential alternative, the authors turn to the currency markets and show that a short euro versus long Japanese yen position has had stable to improving performance as a hedging tool. The key message is that alternative hedging strategies merit a robust discussion and consideration in a low-yield environment.

The partisan divide in U.S. congressional communications after the China shock

AbstractEmerging literature shows that rising import exposure resulting from the China shock devastated U.S. manufacturing and contributed to the rise of Donald Trump. However, several studies found that these recent localized economic shocks did not negatively impact the tenure of incumbent politicians, and this outcome remains a puzzle. In this paper, we examine the partisan difference in congressional communication strategies on China and trade‐related issues. We propose a theory of China‐bashing to explain how members of Congress frame the negative impacts of trade to their voters. Using press release data from members of Congress, we show that, even though Chinese import competition impacted both Republican‐ and Democrat‐held districts, Republican politicians in adversely affected districts responded by increasing their anti‐China rhetoric, while there was no similar difference among Democrats. At the same time, there was no difference between Republican and Democratic messaging on general trade issues. In doing so, Republican legislators were able to support trade liberalization during the Bush and Obama administrations while blaming its negative externalities to their constituents on China.

Economic Uncertainty and Exchange Market Pressure: Evidence From China

This paper evaluates the impact of local and external economic uncertainty shocks on China’s exchange market pressure from a time-varying perspective. We first construct a simple behavioral model to provide some economic background for our empirical analysis. The model identifies two channels, namely market sentiment and market demand, through which economic uncertainty has a time-varying impact on exchange market pressure. Notably, we calculate a new exchange market pressure index for China by considering China’s practice. Using the economic policy uncertainty index as a proxy for economic uncertainty and our new estimates of China’s exchange market pressure, we employ a novel TVP-VAR model controlling for over-parameterization to a monthly dataset from January 2001 to October 2020 to analyze the impact of China’s and U.S. economic policy uncertainties on China’s exchange market pressure. Our empirical findings robustly show that an upsurge in U.S. EPU is followed by appreciation pressure of the RMB against the dollar, while a hike in China’s EPU triggers devaluation pressure on the RMB. In addition, the impact of economic policy uncertainty has considerable time variation in magnitude, especially after mid-2011, showing a trade-off mechanism between the effects of domestic and foreign economic uncertainties on China’s exchange market pressure. Moreover, we attribute the time-varying features to the changes in China’s dependence on the U.S. and in the exchange rate flexibility. Finally, China should further improve the exchange rate flexibility, reduce its dependence on the U.S. and develop a more diversified currency basket in the exchange rate formation mechanism. JEL: F31 C50 E70

Remittances and households’ savings behaviour in Bangladesh

PurposeThe purpose of this study is to examine the impact of remittance inflow on households’ savings behaviour in Bangladesh. Remittances are considered as the countercyclical flow of income for its recipient economies. It surges the liquidity of the households receiving remittances, allows them to endure local economic shocks and facilitates them to practice productive activities. Remittances often form a big pool of resources for investment which complement the national savings and support the country’s growth through higher rates of capital accumulation. Therefore, if a significant portion of the remittance is used for savings it can lead to prominent economic growth in the long term.Design/methodology/approachExisting literature indicates remittance-receiving households have a greater propensity to use remittance income to meet basic consumption. However, based on the survey conducted by the Bangladesh Bureau of Statistics on remittances and household savings (SIR, 2016) and using the ordinary least square regression analysis method, to identify the connection between remittances and household’s saving (SIR, 2016) and using the ordinary least square regression analysis method, to identify the connection between remittances and household’s savings behaviour in Bangladesh.FindingsThe findings of this study represent remittances encourage households to pursue different kinds of savings in Bangladesh. Savings are made in the form of opening savings accounts, deposit pension scheme/fixed deposits/Bonds, insurance policies, also savings through non-governmental organizations, cooperative societies and savings at home. Other than remittances the demographic characteristics of the household head also influence the savings choices.Originality/valueTo enable the implementation of appropriate policies to boost savings, analysis from both perspectives; the household and the national level, requires strong vigilance and surveillance.

Enforcement of Labour Regulation and the Labour Market Effects of Trade: Evidence from Brazil

Abstract How does enforcement of labour regulations shape the labour market effects of trade? We combine local economic shocks generated by the unilateral trade liberalisation in Brazil and enforcement variation across regions to show that regions with stricter enforcement observed: (i) lower informality; (ii) larger losses in overall employment; (iii) greater reductions in the number of formal plants. Regions with weaker enforcement experienced opposite effects. All these effects are concentrated on low-skill workers. Our results indicate that greater flexibility introduced by informality allows both formal firms and low-skill workers to cope better with adverse labour market shocks.

Does the location of directors' additional positions matter? A new dimension of board structure

This paper analyzes the impact on firm value of directors with outside directorships and/or executive positions in the same geographic area (DSAs). The findings show that DSAs are associated with higher firm value because they better understand the local business environment and have better local connections. This value impact is more prominent for rural firms, innovative firms, and firms with high growth rates, indicating that DSAs' local information advantage is more important for firms in areas with less effective information transmission, firms with high R&D expenses, and firms facing high uncertainty. Also, DSAs help corporations better manage local economic shocks, improve financial reporting quality, and increase CEO incentive pay.

The Janus face of bank geographic complexity

We study the relationship between bank geographic complexity and risk using a unique dataset of 96 global bank holding companies (BHCs) over 2008–2016. From data on the affiliate network of internationally active banking entities, we construct a measure of geographic coverage and complexity for each BHC. We find that higher geographic complexity heightens banks’ capacity to absorb local economic shocks, reducing their risk. However, higher geographic complexity can also help banks soften the impact of prudential regulation, increasing their risk. Bank geographic complexity therefore has a Janus face, decreasing some but increasing other aspects of bank risk.

The Importance of Place: Effects of Community Job Loss on College Enrollment and Attainment Across Rural and Metropolitan Regions

Youth living in remote rural communities face significant geographic barriers to college access. Even those living near to a postsecondary institution may not have the means for, or may not see the value of, pursuing a college degree within their local economy. This study uses 18 years of national county-level data to ask how local economic shocks affect the postsecondary enrollment and attainment of rural students, as compared to students in metropolitan and metropolitan-adjacent regions. Results from an instrumental variables analysis indicate that each 1 percentage point increase in local unemployment increases local college enrollment by 10.0% in remote rural areas, as compared to a 5.2% increase in metropolitan-adjacent areas and no detectable increase in metropolitan areas. The rise in rural college enrollment is driven primarily by students enrolling in or continuing in associate degree programs, and by students transferring from 2-year to 4-year programs.

GCC ülkelerinde sukuk üzerine bir inceleme

Since the 1970s, the GCC (Gulf Cooperation Council which is composed of Saudi Arabia, UAE, Qatar, Bahrain, Kuwait, and Oman) members succeeded to have economic development through their natural resource endowment. Nevertheless, starting from the 2000s, they have been struggling with local and international economic and political shocks. It became indispensable to diversify their economies to protect their economies from unexpected external shocks. Islamic financial instruments, particularly sukuk offers alternative solutions to these countries. In this vein, this study focuses on sukuk and its possible role in the macroeconomic performance and sustainable economic growth of the GCC. As a relatively new Islamic financial instrument, sukuk was first issued in 2001-2002 for drawing funds from international funds. Since then, sukuk became one of the most crucial Islamic financial instrument in passing 20 years. The aim of this study is to pinpoint the benefits of sukuk practices for the the GCC economies and analyze how sukuk can contribute to the economic growth in the member countries. The anaysis will be based on the case study. It is concluded that sukuk market has a great potential to contribute to the macroeconomic performance of the GCC. Development of sukuk markets in the GCC will not only promote the financial inclusion but also induce economic growth.

Climate politics in hard times: How local economic shocks influence MPs attention to climate change

AbstractMost countries struggle to implement CO2 reducing policies. Implementation is politically difficult since it typically forces politicians to trade‐off different concerns. The literature on how parties and members of parliament (MPs) handle these trade‐offs is sparse. We use structural topic models to study how MPs in an oil dependent environment responded to a shock in the oil price that created spatially concentrated costs of climate policies. We leverage the rapid oil price drop between parliamentary sessions and MPs’ constituency adherence in a difference‐in‐differences framework to identify if MPs respond differently to variation in the salience of trade‐offs. We find that MPs facing high political costs of climate policies tried to avoid environmental topics, while less affected MPs talked more about investments in green energy when the oil price declined. Our results suggest that the oil price bust created a ‘window of opportunity’ for advocates of the ‘ green shift’.

Moving to Economic Opportunity

In recent years, internal migration rates have fallen to all-time lows, raising questions about why more individuals do not appear to move to encounter more favorable labor market conditions. The fracking oil and gas boom has recently created large, localized economic shocks and corresponding wage increases for men with all levels of education. Fracking can only occur in certain areas exogenously determined by geology, creating a unique situation to identify wage-induced labor migration. In this paper, I first characterize the reduced form migration response to localized fracking booms. The data indicate that migration has been concentrated in North Dakota, with the largest population growth seen among men who are young, unmarried, or moderately educated. Using an instrumental variables (IV) approach to estimate the elasticity of in-migration with respect to wages, I find that a one percent increase in local average wages increased the in-migration rate by 4.6 percent in North Dakota, but only by 3.1 percent in other states. The elasticity in North Dakota is consistently larger across specifications. I find that initial labor market conditions, potential differences in commuting feasibility, and potential non-linear relationships between wages and migration do not seem to explain the geographic difference, while information might play a role. In combination these results suggest that in limited circumstances, there is still substantial migration to potential wage gains, although the magnitude of this response might be severely dampened by external non-market factors, such as the lack of information.

Key Players in Economic Development

This paper analyzes the role of networks in the spatial diffusion of local economic shocks in Africa. We show that road and ethnic connectivity are particularly important factors for diffusing economic spillovers over longer distances. We then determine the key players, i.e., which districts are key in propagating local economic shocks across Africa. Using these results, we conduct counterfactual policy exercises to evaluate the potential gains from policies that increase economic activity in specific districts or improve road connectivity between districts.